Helping Your Kids With Money Problems The Smart Way

Jennifer Woods,|Special to CNBC.com

Published 12:28 PM ET Tue, 8 Feb 2011
CNBC.com

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For most couples, the first months of wedded bliss are full of excitement about what the future will bring. However, those who have recently tied the knot or plan to soon may find themselves face-to-face with some harsh financial realities such as unemployment, debt or difficulty buying a home, sooner than they expected.

Enter: Mom and Dad. Nothing pains parents more than watching their children struggle. Recently, as financial struggle has become more the rule than the exception—household creation actually fell recently for the first time in decades—many financially stable parents are looking for ways to help their newly married children alleviate some of the burden.

If you’re a parent in this boat, there are several ways you can help, though experts say offering a large monetary gift should not be high on your list. Instead, many believe the best way to give a new couple a leg up is by helping in ways that will foster good financial habits in the future.

“Any first step is having a financial conversation with your children so you know where they stand before deciding how to go forward,” says J.P. Scott, a financial consultant with Schwab based in Arrowhead-Sun City, Ariz.. “This conversation is more beneficial than any dollars.”

Questions To Ask

According to Scott, it’s important to get a good picture of the couple’s current financial landscape, as well as their future plans and goals. He recommends asking the following questions:

What is their cash reserve?

Have they started investing?

Are they carrying any student debt?

What savings vehicles are they using?

Do they have a 401(k), IRA or other retirement account?

If there are a lot of financial assets, is there a prenuptial agreement in place?

What are their goals in the near-term?

Are they planning on buying a home?

Do they plan on having children soon?

How has the mixing of their financial situations gone?

Once you have an idea of where they stand, Scott says, “The parents should focus on creating good habits long-term rather than just a giving a monetary gift.”

Non-Cash Assistance

One way of doing this is by offering to match the children’s financial contributions to savings accounts, or agreeing to match the amount they are going to put down on a home.

Scott says you could also make a gift of stock that you currently own to get their feet wet with investing.

Another, creative option, is to buy the new couple a financial plan, or in other words, pay the fee to set them up with a financial planner who can look at their complete picture and provide sound financial and life planning advice.

“It’s a way to make sure they’re getting started on the right foot and establishing good habits,” Scott says.

If your primary focus is on helping with the purchase of a home, which is often the case with couples starting out, there are various ways of doing this without simply offering a large sum with no strings attached.

For instance, David Gilreath and Ron Brock, managing directors of Sheaff Brock Investment Advisors, have a client who made a deal with their child. In exchange for providing the lion's share of the down payment, they split the profits when the house is sold.

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Another client formed a legal partnership through which they buy real estate that they, and their children occupy. In this case, the child lived in one of the homes and paid rent to the partnership. A benefit of this type of family limited partnership is that over time it can be arranged so that the ownership becomes more tilted toward the children over time.

For parents that are very financially sound, another idea is to provide a mortgage directly to the new couple, allowing them to bypass the lengthy and often difficult process of acquiring one from a lender.

It also lets you set your own interest rate and loan terms. If you’re interested in this option, one company that specializes in structuring these types of private loans is Virgin Money.

According to Norm Mindel, a financial planner with Forum Financial, parents may also want to consider setting up a 529 plan—a tax-advantaged savings plan designed to encourage saving for future educational expenses. This can be beneficial if either the child or their spouse wants to further his education. It is also transferable to your other children.

Mindel adds it is also essential to make sure the couple has health insurance.

“That may seem innocuous. But if you have kids living on the edge and work for an employer without health insurance that can be a big problem.”

How To Handle Cash

If you are considering giving a purely monetary gift to a young couple, experts urge caution.

“Downright giving money to a child is a giant mistake,” says Gilreath, who adds, “The way I would spend money when I was 23-, 24- or 25-years-old is a lot different now.”

A better choice is to set up a trust that distributes payouts at various increments, he says, adding that it is best to have the payouts start when the recipient is in his mid-30s.

“The younger a kid is, the worse they treat the money they get”.

Mindel agrees. “There are dozens of different permutations of trusts and they can spread out the benefits over years.”

Creating a trust means legal, tax and accounting expenses, but also offers protection. For instance, if established only in the name of your child, the assets are not considered marital assets if the couple should get divorced.

If you do plan on giving a monetary gift, either outright or through a trust, it is important to consult your accountant to get a clear understanding of what gift taxes may be incurred.

Current law allows each individual to make a tax-free gift of up $13,000 to any number of people per year. So in the case of a couple, each parent can gift $13,000 to their child and $13,000 to the spouse for a total of $52,000 a year.

If you plan on giving more than that, be aware that there is currently a $1-million lifetime tax- exemption limit.

While there are many options around to help a new couple hit the ground running, in the end says Brock it is about creating a long-term strategy to help your kids.